Charter Hall Retail REIT (ASX: CQR)
Last Price: AUD: 4.01 |Fair Value: AUD: 4.15
Business Strategy & Outlook
Charter Hall Retail REIT owns or partially owns an Australian portfolio of about 50 convenience-focused shopping centres, several hundred service stations leased to BP, and Ampol in Australia, Gull in New Zealand, and a distribution centre leased to Coles. More than half of rent comes from tenants who are unlikely to miss rental payments. Recent acquisitions and divestments have transformed Charter Hall Retail REIT’s portfolio. A AUD 177 million portfolio of shopping centres was sold in fiscal 2020. In July 2020, the REIT acquired a stake in a Coles distribution centre with 14 years remaining on the lease, with fixed annual rental increases of 2.75%. As at June 30, 2022, Coles and Woolworths were the largest tenants, representing 16% of income each, and Aldi another 2%. And BP represents about 12% of rental income, up from zero two years ago. Charter Hall Retail REIT actively manages its portfolio, and it’s difficult to precisely predict what type of other assets could enter the portfolio given management’s opportunistic strategy. That said, any future acquisitions will likely have attributes including long-weighted average lease expiries, and be related to convenience or non discretionary retail (as shown with the distribution centre and service station acquisitions).
Rent is Charter Hall Retail REIT’s dominant revenue driver. Unlike many other Australian REITs, it does not operate any meaningful funds management business, and is unlikely to do so given funds management opportunities are housed in the head stock Charter Hall. Essentially Charter Hall Retail REIT is an investment option within the overall Charter Hall suite of listed equities and funds.
Financial Strengths
Charter Hall Retail REIT is in reasonable financial health. Equity raising in April and May 2020 bolstered the balance sheet, partly offset by acquisitions since then. Gearing reduced from nearly 35% in December 2020 to 33% in June 2022 (measured by look-through gearing, which is net debt/assets, including debt obligations in underlying vehicles, and on a pro forma basis to include the impact of the Gull service acquisition). This is toward the lower end of the look-through target portfolio range of 30% to 40%. More likely to see a little buffer to the group’s debt covenants, given asset declines are likely as interest rates rise. That would push up gearing even without further acquisitions. However, it looks comfortable overall, given the long leases and secure tenants over a large chunk of the portfolio. Higher debt costs could also be a headwind to earnings, and if interest rates rise fast and far enough it could result in declines in distributions in the short term. However, in the long run revenue growth will mitigate that effect.
Bulls Say
Company Description
Charter Hall Retail REIT owns and manages a portfolio of convenience focused retail properties, including neighborhood and sub regional shopping centres, service stations, and some retail logistics properties. The REIT is managed by Charter Hall, a listed, diversified fund manager and developer, which owns a minority stake in Charter Hall Retail REIT and frequently partners with it on acquisitions and developments. More than half of rental income comes from major tenants Woolworths, Coles, Wesfarmers, Aldi and BP (the latter occupies service station assets). The portfolio is more seasoned than some convenience rivals, with approximately 80% of supermarket tenants at or near thresholds for paying turnover-linked rent.
(Source: Morningstar)
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